At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Zipcar's got a Need(ham) for speed
In less than a week, Zipcar (Nasdaq: ZIP ) will merge into the heavy traffic of earnings season, when the car-sharing pioneer reports Q3 earnings. Not many investors are optimistic about the results, and the consensus is that Zipcar will lose about a penny a share. One analyst, though, broke away from the pack yesterday, when ace stockpicker Needham & Co. recommended buying the shares ahead of earnings.
Is that a good idea?
Let's go to the tape
I actually don't think it is, and I'll tell you why ... beginning with the analyst's record. Fools, in many respects Needham is a fine analyst. According to our CAPS supercomputer, this analyst ranks in the top 12% of investors we track. The problem, though, lies with the stocks that Needham tracks.
Top-ranked this banker may be, but Needham's success owes largely to its performance in just a few sectors of the economy -- luxury goods, for example, where 87% of its picks are outperforming the market, or aerospace, where four out of five Needham picks outperform the S&P. In contrast, the analyst has essentially no track record to speak of in the car-rental industry. We don't know what it thinks about Avis Budget (NYSE: CAR ) , for example. Or about Hertz Global (NYSE: HTZ ) , or Dollar Thrifty, either.
What we know, and ...
What we do know is that if you stack Zipcar up against any of these rivals, it comes out looking like a loser. Avis, Hertz, and DT are all profitable companies, you see. Zipcar isn't. If it's expected to report a loss next week, well, that's no worse (or better) than it's done in any of the past four years. Most years, Zipcar loses about $15 million, despite growing its revenues fourfold in as many years.
And even if you find the revenue growth encouraging, or like the fact that Zipcar is growing operating cash flow in tandem, you have to be worried about the fact that the company's expanding its capital spending even faster than the cash rolls in. While operating cash flow has expanded from negative $8 million to positive $22 million since 2007, capex is up from $2 million to $70 million -- leaving Zipcar in the red, free cash flow-wise, to the tune of $48 million.
... what we can guess
True, Zipcar has stomped the gas pedal in recent quarters, and is picking up some measure of speed. Perhaps helped by having an eco-conscious administration in Washington, the company recently landed a "blanket purchase agreement" with the U.S. General Services Administration's Office of Motor Vehicle Management. But even that isn't quite as good as it sounds. This is actually more of a blanket rental agreement, in which government employees will be permitted to rent Zipcar vehicles by the hour rather than, say, Hertz cars by the day.
Zipcar also made headlines last month when it teamed up with Ford (NYSE: F ) to provide 650 cars for rental use at college campuses across the nation. Again, this sounds pretty good for Zipcar. It suggests Detroit is getting behind the hourly car rental business model -- but it won't last.
Why not?
Because to be perfectly blunt, it's not in Ford's interest to make this last. I mean, think about it. What's "in it" for Ford to do this deal with Zipcar? If I'm Ford, I'm looking at the Zipcar contract as a way to increase my brand's exposure to college kids -- to get them to essentially take four years' worth of test drives of my cars ... so that when they graduate and get jobs, they will ultimately buy Fords.
And that's the key point here, folks: Ford wants kids to buy their cars. So do Toyota (NYSE: TM ) , Honda (NYSE: HMC ) , General Motors (NYSE: GM ) -- everybody whom Zipcar investors might view as potential "partners" to their company. Renting cars is a means to an end here. The last thing the car companies really want to do is encourage people to just rent cars for occasional use, because once people realize the cost savings from this, they might decide not to buy a car at all. Long term, a successful Zipcar would be a sales-killer for Detroit (and Tokyo). So long term, I don't expect Zipcar will get nearly as much support from the auto industry as folks might hope.
Foolish takeaway
So where does this leave Zipcar at the end of the day? Right where it started: lacking scale to compete with Hertz and Avis, which can undercut it on price. Lacking support from the automakers. A dream stock for green-thinkers -- but a pipedream for investors.
Who's ultimately going to be proven right about Zipcar -- Rich, who doubts its future, or the team at Motley Fool Rule Breakers, who have endorsed the stock alongside Needham? Add Zipcar to your Fool Watchlist and find out.
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